The good news is that the market had a big bounce and closed near the highs after a weak open. The bad news is that the action still wasn't very good. Breadth was about 2,450 gainers to 3,325 decliners, and the number of new lows was almost five times the number of new highs, but there were pockets of momentum. GoPro (GPRO), Arista Networks (ANET), Ambarella (AMBA), Jack in the Box (JACK) and Mobileye (MBLY) attracted the hot money, but it looks more like Ponzi-scheme action than buyers with high levels of conviction.
While a few stocks did move to the upside, most continued to look lackluster, at best. Market players are so used to buying opens like this morning's that they did their thing but it didn't have the same frantic feel of many previous Monday morning gap-downs.
The market has typically bounced back well after a couple of failed bounces like those that we've seen in the past week. Also, the strong finish was a good sign, but small-caps still look weak and the small number of stocks making new highs makes it clear that this is a narrow market.
While the bulls can make a case that the market is ready to turn back up, they don't have much hard evidence other than the general tendencies of the last couple of years. We don't see this sort of selling continue for long. If there is another leg down, it will be a major change in character.
This market still demands a high level of caution, but there are flickering signs of hope.
Have a good evening. I'll see you tomorrow.
Sept. 29, 2014 | 1:39 PM EDT
It's Different This Time
- This pullback indicates the algos have changed strategy.
For the past few years, the defining characteristic of the market has been its tendency to bounce back from pullbacks in a straight line. Market players have been able to count on the market going right back up without much fuss. This tendency squeezes shorts creates a supply of underinvested bulls that make the V-shaped bounces a self-fulfilling prophecy.
The current pullback is playing out a little differently. We've already seen two failed bounces, and the bounce today, after a very poor open, has lost traction at midday. Once there's a bounce like this morning's, it's usually smooth sailing to a close at the highs.
This choppier action is what you normally expect to see when human emotions are involved, but it also may be caused by changes in the computer programs that make up the great bulk of volume in this market. The algorithms have been a big factor in creating V-shaped moves, but these programs have to change over time to keep an edge.
Market players have consistently provided very good support after pullbacks of this magnitude. In addition, as I've noted, the broader market has already undergone a much deeper correction than is reflected in the senior indices. Many stocks are washed out and they are starting to attract "value" buyers.
There has definitely been a change in the character of the market. Whether that continues to develop, we'll have to wait to see, but there definitely are issues with our old friend, the V-shaped bounce.
Sept. 29, 2014 | 10:22 AM EDT
A Rare Failed Bounce
Still, I'm optimistic about the opportunities this will yield.
The market is now working on its second failed bounce in four days. This has been very rare behavior for the market over the last few years. Market players have been well conditioned to buy dips, especially after one failed bounce.
We're seeing some major ugliness this morning as the big Friday bounce sucked buyers back in. The celebratory headlines on CNBC about the biggest rebound in many months certainly were not helpful, as they encouraged the mindset that the market just can't undergo sustained downside.
It is going to be particularly interesting this morning to see if the market can hold above the early lows. That has tended to be a pretty good bet -- but if the indices do roll over and make an intraday low, it's likely to feel like a rather panicky move as another round of stops are triggered.
Despite this poor action, I have to admit that I'm increasingly optimistic about the opportunities this will create. Many small-cap stocks are already washed out, and this pounding is taking them to some key support levels. It is always possible that the drubbing will continue, but quite a few things look washed out, and you can be sure the computer programs are kick-in at some point and give the market a big spike back upward. The challenge is timing it with some degree of accuracy.
I've already raised substantial cash last week, so I'm not doing any new selling at this point. I have my eye on things such as Alibaba (BABA), CyberArk Software (CYBR) and Palo Alto Networks (PANW) that I'd like to buy as the stocks improve. A new stock I added to my radar this morning is Super Micro Computer (SMCI), which is bucking the trend.
The shopping list is going to have some interesting items on it as this plays out -- but patience is key.
Sept. 29, 2014 | 7:26 AM EDT
This Market Is Worse Than It Looks
- Almost half of the stocks are down 20% or more.
"Life is a series of natural and spontaneous changes. Don't resist them; that only creates sorrow. Let reality be reality. Let things flow naturally forward in whatever way they like."
The market is currently undergoing its fourth dip of the year. We had the deepest correction back in January, which caused many market players and pundits to believe that the days of Fed-induced upside were over. That provided to be spectacularly wrong. The market embarked on another V-shaped move in February and then had two fairly minor pullbacks in April and August.
The current pullback has caused a high level of concern once again. There is much talk that we are due for a market "event." Seasonality has helped to increase the level of concern, but most of the pessimists are focused on the slow movement of the Fed to a more hawkish stance. Although Janet Yellen and her gang have yet to change some key language in the Fed policy statement, it is clear that it is going to happen soon, and it is making the market skittish.
In addition to worries about the Fed, concerns about the economic environment in Europe and Asia are causing problems as well. The struggles overseas help to keep interest rates down but the dollar has been ripping higher since July. Take a look at the chart of the PowerShares DB US Dollar Bullish ETF (UUP) to see how things have turned, as far as respect for the dollar.
The bulls are rather sanguine about the current situation, as time and time again the market has quickly shrugged off these pullbacks. It just hasn't paid to be overly bearish. It seems that almost as soon as you take defensive action, the market will turn and leave you scrambling to add back some long exposure.
The market action has consistently created a supply of underinvested bulls that take defensive action and then are caught leaning the wrong way when the market recovers. This past week it was the bears who were surprised by two big bounces, on Wednesday and Friday, but we are giving most of the bounce back again this morning.
The most notable thing about the market isn't that we are undergoing a dip but that so many stocks, particularly small caps, have already corrected very deeply. Almost half of the stocks in the market are down 20% or more and are in a bear market already. The indices are catching up a little, but they don't come close to fully reflecting what has really been going on.
The best example of how the indices are misleading is the list of stocks making new 12-month highs and lows. On Friday we had only 55 stocks making new highs, while there were 250 new lows. That ratio is something you'd expect to see closer to a bottom than just barely off new highs just seven trading days ago.
A few big caps have been safe havens and have helped to hold up the market but overall this market has been far worse than it looks, especially if you just take a quick glance at the DJIA or the S&P500.
The answer to dealing with this market is to not be too caught up in trying to navigate the big picture. It is extremely chaotic and choppy right now. You are better off just focusing on individual stocks. If they aren't working, cut them and wait for things to set up again. If you are following this approach you are already heavily in cash. The key now is to simply monitor the market and keep looking for better action.
Things look soft this morning as political protests in Hong Kong are causing some concerns but that is more an excuse for a market that already has some technical issues. Be careful out there.